As in other industries, the costs of raw materials, manufacturing, promotion and distribution of tobacco products are important in determining profits to tobacco growers, manufacturers, wholesalers and retailers. However, because tax is such a substantial component, the level and nature of tobacco duties, fees and taxes—rather than production and marketing factors—historically have been the main determinants of the final retail price of cigarettes over time in Australia as in most developed countries.

This section examines the extent to which increases in tobacco taxes
have resulted in rises in the price of cigarettes and other tobacco
products in Australia. It outlines efforts by manufacturers to reduce
the impact of increases in taxes, both by minimising tax liability, by encouraging discounting at the retail level, through differential pricing of particular brands and by varying the bundling of cigarettes and other tobacco products to affect upfront purchase price and unit cost.

13.3.1 Recommended retail price of tobacco products

Since 1940, the NSW Retail Tobacco Traders' Association has been
printing and distributing to small retailers in all states and
territories lists of the wholesale and recommended retail prices for cigarettes and roll-your-own tobacco produced by major international tobacco companies, and virtually all cigars and pipe tobacco, sold in
Australia.1–4i
Copies of the publication preserved at the National Library of
Australia and several other libraries throughout the country provide
recommended prices for tobacco products available for sale in any
state or territory since that date.

13.3.1.1 Changes over time in the recommended retail price of a standard pack

Recommended retail prices for Craven A Cork Tip 20s—a brand of cigarettes popular in the
1940s, '50s and '60s in Australia, and one of a handful of brands
available in 1940 still available in 2015ii—are listed in Table 13.3.1. When examining the cost of tobacco products
over time, it is useful to take into account the effects of
inflation–the costs of buying all goods and services. Table 13.3.1 also
indicates the price adjusted to take into account changes in the
Consumer Price Index (CPI). (The CPI uses 2012 as the base year, the
year when the index is set to 100, so it is convenient to express prices
in 2012 dollars.) This table also shows the current and 2012 pack price for Winfield 25s, the Australian brand with highest market share between the late 1970s and 2015—refer Chapter 10, Section 10.6.

Table 13.3.1
Price of a packet of Craven A 20s, Australia, 1940–2015, and price of a packet of Winfield 25s, 1980–2015, selected years

Sources: NSW Retail Traders’ Association 1940 and 1948;1 1950 to 1975;2 and 1980 to 20143; and 2014 to 2015 5

^ Equivalent prices in dollars converted from shillings and pence

* Current dollars: the price in the applicable year; no adjustment has been made for inflation

# Prices for the month of February for 1940-2013, then for the month of March from 2014

† Cork Tip 20s available to February 2004, 20s pack equivalent price calculated from RRP of 25s for 2005 onward

Figure 13.3.1 plots the price per stick of Craven A 20s and Winfield 25s in $2012 from 1940 to 2015.

† Using Cork Tip 20s to February 2004, then 20s stick price equivalent price calculated from RRP of 25s for 2005 onward

Table 13.3.1 shows that the current price of a packet of Craven As increased 160-fold between 1940 and 2015. However, as is evident from Table 13.3.1 and Figure 13.3.1, adjusting for inflation, Craven As cost no more in the early 1990s than they did in real terms during and immediately after the Second World War. Prices then increased substantially from the early 1990s. In real terms the stick price of Craven A in 2015 was almost five times higher than in 1940–reaching $1.14 per stick in 2015. Between 1980 and 2015, the stick price of both Craven A and Winfield increased more than five-fold in real terms.

It is also important to consider the pricing of popular alternative tobacco products when examining the price of cigarettes. In Australia, the most common factory-made (FM) cigarette alternative is roll-your-own (RYO) tobacco. RYO tobacco and FM cigarettes have been essentially taxed at the same rate, so that the tax per 0.8 grams of roll-your-own tobacco is the same as the per stick rate for most FM cigarettes—see Section 13.2.1. However, because most RYO users roll less than 0.8 grams of tobacco per cigarette, RYO tobacco provides a cheaper alternative to FM cigarettes. Further, as more budget brands and smaller pouch sizes have entered the RYO market in recent years, the up-front cost and price per cigarette of RYO products have provided a reliably cheaper alternative to FM cigarettes.

Figure 13.3.2 compares the recommended retail prices of the lowest-priced available FM pack and RYO pouch, and cheapest available FM stick and RYO stick prices (assuming 0.7 grams of tobacco per RYO cigarette), over time. Prices for all items have increased over time, particularly since 2010. However, the rate of increase for FM packs and sticks is greater than that of RYO products. The effect of this is two-fold. First, the gap between the price of the cheapest available RYO pouch and the cheapest FM cigarette pack (i.e. those with the lowest up-front purchase price) has shrunk. In March 2017, a 20 gram pouch of RYO tobacco cost only $1.30 more than the lowest-priced pack of 20 cigarettes, but would yield around 8 more cigarettes. In contrast, in 2001, the cheapest pouch of RYO tobacco cost was almost double the price of the cheapest FM cigarettes. While the cheapest RYO pouch in 2001—a 30 gram pouch—would have yielded substantially more cigarettes than the pack of 20 cigarettes, the upfront cost to the consumer was substantially more. The introduction of pouches of 20 gram RYO tobacco to the market in 2016 further slowed the rate of increase of minimum RYO pouch prices in later years.

Second, Figure 13.3.2 shows that gap between the cheapest FM cigarette stick and cheapest RYO cigarette stick (at 0.7 grams) has progressively widened since 2001, particularly since 2010. The per stick price represents the best value for the consumer, that is, the most economical option available. The cheapest FM cigarettes were only $0.05 more expensive than the cheapest RYO cigarettes in 2001. This can also be expressed as a ratio of 1.2, meaning that for each FM cigarette, a smoker could purchase 1.2 RYO cigarettes for the same price. In 2017, the price difference between the cheapest RYO and FM cigarettes was six times higher at $0.30. A smoker could afford 1.5 RYO cigarettes for the price of the cheapest FM cigarette.

As noted in Section 13.2, in its Budget of May 2017,6 the Australian Government determined that excise and customs duty on roll-your own tobacco would be harmonised over the following four years with that on factory-made cigarettes, so that the rate in September 2017 was reduced to the equivalent of 0.775 grams per cigarette, reducing to 0.75 in September 2018, 0.725 in 2019 and 0.7 grams in 2020.7,8 This measure is expected to take the price of a cigarette made with roll-your-own tobacco closer to the price of a factory-made cigarette, and the price of even the smallest roll-your-own pouches to be higher than that of most packs of cigarettes.9,10

Note: In current dollars: the price in the applicable year; no adjustment has been made for inflation

13.3.1.3 The large pack: a peculiarly Australian phenomenon

Cigarettes in the early part of the century were commonly sold in packets of 10 or 20 or in tins of 50. These were similar in size to the tins in which loose tobacco was commonly sold. With the advent of plastic wrapping, however, these tins disappeared and by 1960 the vast majority of cigarettes were sold in packets of 20. The increasing rate of state licence fees had a significant impact on the price of brands that were popular until the early 1970s. However the tobacco industry fought back to retain its customers and the introduction of Winfield 25s—'5 smokes ahead of the rest'—in 1976 marked the advent of the large pack size in Australia.

Until 1999, Australia was virtually the only country in the world that combined an excise based on weight and ad valorem fees based on wholesale value of sales. Until 1999, lighter cigarettes attracted less federal excise and customs duty than heavier cigarettes. This effect was amplified by the manner in which ad valorem fees were imposed and final retail price calculated, providing an incentive for lighter cigarettes and for packaging many cigarettes in the same packet.12 The introduction of large pack sizes in Australia closely followed the introduction in 1975, and subsequent doubling in about 1987, of state franchise fees throughout Australian states. In most other countries in the world, cigarettes are virtually always sold in packets of 20.

While the price per stick of the most popular brand rose quite sharply as a result of a number of increases in duty and state licence fees on tobacco (Figure 13.3.3), the per stick prices of large packs of cheap brands remained substantially lower than the market-leading pack—see Table 13.2.2. Not surprisingly, large packs quickly became a dominant component of the market (see Table 13.3.3).

While the recommended retail prices of premium brands of cigarettes such as Marlboro, Dunhill, Benson and Hedges and Craven A—brands available in packs of 20s and 25s—rose steadily from the early 1980s, consumers concerned about price have always been able to purchase cigarettes that are substantially cheaper per stick. As of 2017, large packs in Australia include 30s, 35s, 40s, 43s, 44s and 50s, as well as a range of smaller packs in 20s, 21s, 22, 23s, 25s, and 26s.

Figure 13.3.3 plots in more detail the per stick price calculated from the recommended retail price of the leading brand of cigarettes of each year over time, indicating some of the major changes in taxation arrangements between 1940 and 2017, and some of the major innovations with which the industry responded to those changes.

Figure 13.3.3
Recommended retail price of the most popular cigarettes in Australia, 1940–2017

Once again, Figure 13.3.3 shows that the effects of early increases in
state licence fees were mitigated by the introduction of larger and
larger pack sizes providing cigarettes at a cheaper cost per stick than
those available in smaller pack sizes. It was not until the very large increases in state fees and excise duty
in the mid-1990s that cigarettes became significantly more expensive.

Recommended retail prices changed little before the 1990s, then increased steadily over the late 1990s so
that, in real terms, by 2001 the recommended retail price of cigarettes
was three times greater than what it had been in 1948. The effects of the 2010 and 2013-16 increases in excise and customs duty are also clearly evident. The recommended retail price of the most popular cigarettes was two and a half times higher in 2017 than 2001 in real terms.

As outlined in Section 13.2.1, health groups argued for reform of tobacco taxes12, 14-16 and a new system was
introduced between 1999 and 2001.

Table 13.3.2 and Figure 13.3.4 show the pack price for Horizon and Holiday 50s rising above $30 in February 2013, and then both exceeding $40 in March 2016. In March 2017, it cost $20 more to buy a pack of Horizon 50s than a pack of Winfield 25s. Over time, there has been a dramatic widening of the difference between the highest and lowest priced packs. For example, in 1992 a pack of Winfield 25s could be purchased for about three-quarters of the price of a pack of Horizon 50s, while in 2017 the purchase price of a pack of Winfield 25s was 60% of a pack of Horizon 50s. As of 2017, Holiday 50s were no longer included in price lists (all Holiday products have been delisted), while Horizon 50s were priced just under $50.

Table 13.3.2
Retail prices of leading brands, Australia†, 1989 to 2017: recommended retail price and price differential between largest pack and leading brand

† Recommended retail prices from Victoria from 1989 to 1997, then for all of Australia from 1998.

* In current dollars: the price in the applicable year; no adjustment has been made for inflation

Note: Price at February of each year for 1989-2013, then at March of each year for 2014 onward.

Note: No Holiday products listed in 2017.

The proportion of cigarette sales that were of larger pack sizes (i.e. 30s and larger) in Australia are provided for years for which this is available—refer to Table 13.3.3.

Table 13.3.3
Percentages of sales of each pack size of cigarettes in Australia 1981 to 1997 and 2006 to 2013–20s and 21s, 22s and 23s, 25s, 26s, 30s and 35s, and 40s and 50s (%)

Source: Nielsen data for sales in November and December, published irregularly in The Australian Retail Tobacconist;18 12 months to September 1997, Grocery only, Retail World December 1997 and December 2006 to 2013

* 21s, 22s, 23s, and 26s pack sizes added in 2013

Use of packs of 30s and 35s has also declined among secondary school students—see Figure 13.3.5.

Figure 13.3.5
Pack size smoked among secondary-school students 12–17 years who smoked in last week*—1996, 1999, 2002, 2005, 2008, 2011 and 2014 (%)

Sources: White V and Williams T personal communications, using data from surveys of secondary-school students reported in Hill, White and Effendi;19White and Hayman 200420 and 2006;21 White and Smith 2009;22 White and Bariola 201223 and White and Williams 201624

Note: In 2014, in addition to the usual response options of 20s, 25s, 30s, 35s, 40s, and 50s, a response option of “another pack size” was provided. A total of 15.8% selected this option, including 6.2% who nominated a valid other pack size (22s or 26s). All other students who did not nominate a valid FMC size are not reported on.

# Included 22s and 26s in 2014.

* Multiple responses allowed; totals do not always equal 100% in each year

Between 1999 and 2002, during the period of reform of the tax system,
the percentages of secondary school students using large packs declined
by about 18%, which included a 29% reduction in the percentage of
teenage smokers preferring 40s, and a 32% reduction in the percentage
preferring 50s. The proportion of secondary students smoking from large packs has declined by 45% from 1996 to 2014. The popularity of 30s and 35s and 50s was notably lower in 2014, while the popularity of packs of 40s had increased by more than 60% from 1996 to 2014. However, Figure 13.3.5 also shows that the proportion of secondary school students smoking these less popular packs of 40s and 50s has fluctuated over time.

13.3.2 Prices at which tobacco products are sold/purchased

Working out the price of cigarettes and other tobacco products is by no
means a straight-forward matter. The prices at which cigarettes are offered for sale may differ significantly from those recommended by manufacturers. Many different brands of cigarettes are sold–more than 50 in Australia in 201425 –from many different outlets; there were more than 35 000 outlets in Australia in 2004.26,27 Some types of outlets are more likely to sell at discounted prices, but
not all brands are discounted to the same extent within the same
periods of time. Obtaining a representative sample of prices for even a
single brand over time would be a costly exercise. Obtaining a
representative sample of prices for a large number of brands is simply
not feasible.iii
Many researchers attempt to address this difficulty by using prices of
just the brand of cigarettes most popular in the population they are
studying, but this may not give a picture representative of the entire
cigarette market due to consumers seeking to minimise costs by shifting
to cheaper brands or pack sizes, bulk purchasing, or shopping at
lower-cost outlets.

In the 2003 study by Ross and Chaloupka28 discussed in Section 13.1.5, the average cost of cigarettes in a particular state (as
calculated by industry sales records) correlated only weakly with the
cost (in their local store) of the brand of cigarettes preferred by
secondary school students. The study found that consumption fell much
more dramatically in response to changes in prices reported by teenagers
than to changes in state-average cigarette prices. The choice of
indicator for price may critically affect the outcome of research on
price effects, and, as demonstrated in Section 13.3.1.2,
the pricing policies adopted by companies may undermine the
effectiveness of tax policy as a means of discouraging tobacco
consumption.

13.3.2.1 The Cigarettes and Tobacco Sub-group of the Consumer Price Index

The longest-running indicator available of the actual price of
cigarettes for sale in Australian shops is provided by the component of
the Tobacco and Alcohol Sub-Index of the CPI that covers tobacco
products.iv The CPI and its sub-indexes are constructed each quarter by the Australian Bureau of Statistics using in-shop surveys monitoring a 'basket' of goods that might be purchased by a typical Australian household.29 Table 13.3.4 shows the average index figure for the Cigarettes and
Tobacco Sub-group of the Tobacco and Alcohol Sub-index of the CPI for
each year since it was first published in 1973.

Table 13.3.4
Cigarettes and Tobacco Sub-group of the Tobacco and Alcohol Sub-index of
the CPI, average all capital cities, all quarters, 1973–2017 (annual
average index figure)

It
is evident from Table 13.3.4 and Figure 13.3.6 that tobacco prices, as
determined in the Australian Bureau of Statistics price survey, have risen
significantly over time, with notable rises in the mid-1990s, early 2000s, and from
2010 onward. Tobacco prices rose even between 2001 and 2009, during which time
the excise and customs duty on tobacco products was increased only in line with
the CPI, indicating increased margins to manufacturers and retailers (and also
to state governments in GST revenue). The last steep increase in Tobacco CPI corresponds to the
implementation of the first of four annual 12.5% excise and customs duty increases implemented on 1 December 2013.

13.3.2.2 Discounting in the tobacco market

While small retailers such as proprietors of local corner stores sell cigarettes at the recommended prices, the
majority of cigarettes in Australia are sold at considerably lower
prices. As well as selling single packets of cigarettes at well below
the recommended prices, most supermarkets and tobacconists also sell
cigarettes in
multi-pack
bundles such as twin packs and
cartons at a discounted rate. In its 1994 report on the
cigarette industry, the Prices Surveillance Authority noted various
common forms of discounting, including lower prices for stock bought in
high volumes, and the phenomenon of 'specialling' where manufacturers
encourage high-volume retailers (especially tobacconists and
supermarkets) to discount one or two of that company's brands for a week
or longer periods.31

An in-shop study undertaken through the period May 1997 to February 2001 by the Centre for Behavioural Research in Cancer (CBRC)32 indicated significant discounting of cigarettes over that period. The
study surveyed the pack and carton prices of the five most popular
brands of cigarettes in each state in a selection of all the major types
of stores in a sample of suburbs in each major urban centre throughout
Australia. On average, cigarettes in Australia were sold at 5.8% lower
per stick than the recommended retail price, with considerable variation
between brands and outlet types. Average discounting ranged from 4.4%
for Benson and Hedges 25s to 6.8% for Horizon 50s. Petrol stations
tended to sell cigarettes at slightly higher than the recommended retail
price (about 0.3% higher across the study period) but discounting was
common in supermarkets and tobacconists (with an average discount of
9.3% and 10.9% respectively). Per stick prices of cigarettes sold in
cartons were about 14% lower than those sold in single packs.

Table
13.3.5 sets out the retail prices of a number of popular brands, comparing the per
stick recommended retail price with single pack and multi-buy (twin-pack) prices at May 2014 from observations of tobacco product boards completed in a
variety of supermarkets in metropolitan Melbourne, Australia.

13.3.2.3 Prices paid as reported by smokers

An alternative approach to calculating prices of tobacco products is to
ask smokers what they paid for their last packet of cigarettes or
smoking tobacco. While not suitable for all research purposes, such data
do provide very accurate information about price as actually
experienced by consumers.

Studies based on interviews with US tobacco users have indicated
significant recent increases in the percentages of smokers turning not
just to cheaper brands, but also to cheaper forms of tobacco
(roll-your-own and chewing tobacco); cartons in preference to packets;
discount outlets; and, where this is convenient, duty-free and illicit
tobacco products.34 In Australia,
following the abolition of state business franchise fees on tobacco,
there was a similar shift to roll-your-own including illicit 'chop-chop'
(see Section 13.7), and to cartons and to discount outlets.35 Changes to tobacco taxes in Australia in 1999 made it much less attractive for
smokers to turn to larger pack sizes and budget brands as a means of
cushioning themselves from tax increases, and as intended, following
introduction of reforms, smokers shifted back to smaller pack sizes with
a lower up-front purchase price.36

Technical Appendix 13.3.1 sets out data on recommended retail prices (RRP) and reported prices paid for the ten most popular brands of cigarettes collected from Australian smokers interviewed as part the International Tobacco Control Policy Evaluation Study for the years 2002–14.37Figure 13.3.7 plots the average reported prices paid for the top ten brands (weighted by brand share) against their RRP (weighted by brand share), and the percentage difference between the reported prices and RRP in each year.

Figure 13.3.7
Recommended retail prices per cigarette of leading brands in 2002–14 versus reported prices paid by consumers, and percent difference in prices

* Brands most commonly nominated as smokers' regular brands in the Australian arm of the International Tobacco Control Policy Evaluation Study; Marlboro and JPS equal tenth most popular in 2010.

Between 2002 and 2014, the prices consumers reported paying continued
to be substantially lower than those recommended by retail trade
associations. Over time, the degree of difference between recommended and reported prices grew, such that by 2014, the weighted average price paid was almost 12% lower than the weighted average recommended retail price.

While it is possible that consumers misremember and round down prices,
clearly the recommended retail prices overestimate the actual prices
paid by consumers. Indexes such as the CPI based on price monitoring
surveys may also significantly overestimate prices experienced by
consumers unless sampling is adjusted to take account of changing sales
patterns, in particular those reflecting consumer efforts to seek lower
prices.

13.3.3 International comparisons of the price of tobacco products

To accurately assess the pricesv of Australian cigarettes compared with those sold in other countries,
it is important to use consistent methods for collecting price data.
Estimated prices for a single country will vary widely depending on the
brand and brand variant selected and the sorts of retail outlets from
which data are collected.

13.3.3.1 International comparisons of average cigarette prices

Average
cigarette prices are collected annually as part of the Economist Intelligence
Unit's Worldwide Cost of Living survey. Figure 13.3.8 shows the price (expressed in US dollars) of a typical
pack of cigarettes sold in a sample of supermarkets, mid-priced stores and speciality
retailers for the ten most expensive cities in the world in 2014. Sydney and
Melbourne were ranked the fifth and eighth most expensive cities, respectively,
although had the most expensive average cigarette prices (followed closely by
Oslo). Average cigarette prices in Sydney and Melbourne in 2014 were almost
three times higher than compared to 10 years ago (2004).

Figure 13.3.8Average price in $US for pack of 20 cigarettes
in the 10 most expensive cities in the world as of 2014

Note: In current US dollars: the price in the applicable year; no adjustment has been made for inflation

13.3.3.2 International comparisons of prices paid

The World Health Organization provides detailed comparative information on tobacco pricing across all WHO member states.39, 40 Figure 13.3.9 presents tobacco pricing data for Australia and a range of other countries for the top-selling brand within each country (in international dollars), and the price of the top-selling brand, the cheapest brand available, and for the brand Marlboro (all in US dollars), from 2016. In international dollars, the price of a pack of 20s of the top-selling brand in Australia compared all other selected countries. The price of Marlboro 20s and the cheapest brand (both in US dollars) was higher than in all other selected countries other than New Zealand.

Figure 13.3.9Comparative prices of packs of 20s in international and US dollars, selected countries, 2016

Note: Data on price of Marlboro and cheapest brand not available for United States and Canada. The price is a sales-weighted average of prices in all states in the US. Sales vary widely between Canadian provinces. The price shown is a sales-weighted average of the price in Canada for the most sold brand.

i
A small number of brands (such as Deal and Harvest) are sold only from supermarket chain Coles, produced under special arrangement with a
manufacturer in Germany.

ii
Other brands available over the entire period include Camel and Dunhill. Craven A Cork Tip 20s were discontinued in 2004, thereafter the equivalent price of a pack of 20s was inferred at 80% of the recommended retail price of a pack of Craven A 25s. Craven A products have not been included in price lists since late 2016.

iii In the US, tobacco companies publish detailed information on the average price of each brand based on sales data.

iv
Cost-of-living surveys published at various times have tracked the
price of a single brand of cigarettes, but none of these has been
regular and long-running.

v This section concentrates on prices only. For a full understanding of the costliness of cigarettes in Australia compared to cigarettes in other countries, see also Section 13.4.3. This assesses the relative affordability of cigarettes in different countries, examining prices relative to the cost of other goods and to income-earning capacity.

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14. Australian Council on Smoking and Health, Australian Cancer Society, National Heart Foundation of Australia, Anti-Cancer Council of Victoria, and et al. Proposal to increase excise on tobacco. A submission to the Australian Federal Government. Perth: ACOSH, 1990.

15. Australian Council on Smoking and Health, Australian Cancer Society, National Heart Foundation of Australia, and Anti-Cancer Council of Victoria et al. Tobacco Taxes: a case for action. A submission to the Australian Federal Government. Perth: ACOSH, 1992.

16. Australian Council on Smoking and Health, Australian Cancer Society, National Heart Foundation of Australia, and Anti-Cancer Council of Victoria et al. Tobacco excise duties. Submission to the Australian Federal Government. Perth: ACOSH, 1994.

19. Hill D, White V, and Effendi Y. Changes in the use of tobacco among Australian secondary students: results of the 1999 prevalence study and comparisons with earlier years. Australian and New Zealand Journal of Public Health, 2002; 26(2):156–63. Available from: http://www.ncbi.nlm.nih.gov/pubmed/12054336

21. White V and Hayman J. Australian secondary school students’ use of alcohol in 2005. Report prepared for Drug Strategy Branch, Australian Government Department of Health and Ageing. National Drug Strategy monograph series no. 58, Melbourne: Centre for Behavioural Research in Cancer, Cancer Control Research Institute, The Cancer Council Victoria, 2006. Available from: http://www.nationaldrugstrategy.gov.au/internet/drugstrategy/publishing.nsf/Content/mono58.

24. White V and Williams T. Australian secondary school students’ use of tobacco, alcohol, and over-the-counter and illicit substances in 2014. Melbourne, Australia: Centre for Behavioural Research in Cancer, Cancer Council Victoria, 2016.